Westcoast Natural Gas Pipeline Winter Outlook

Basis prices in the Pacific Northwest are likely to see high volatility this winter following an explosion on a key source of supply to the market. The Westcoast Pipeline explosion in British Columbia and the resulting capacity limitations have tightened supply for Northwest Pipeline (NWPL) and led to dramatic price movements. Westcoast’s ongoing repair and inspections are likely to continue to have significant market implications in western Canada and the U.S. Pacific Northwest for the first several months of this winter.

The 36-inch mainline on Enbridge’s Westcoast Pipeline in British Columbia (BC) ruptured and exploded near Prince George on the evening of Tuesday, October 9. The 36-inch line and the parallel 30-inch line were both shut down to assess damage, and the 30-inch line was subsequently brought back into service at 80 percent of normal capacity on Wednesday, October 10. This Force Majeure event resulted in a decrease of over 800 MMcf/d in Westcoast’s southbound flow through the “STATION 4B SOUTH” meter relative to the previous 30-day average.

Map of Westcoast and NWPL, and flows at Station 4B and Westcoast's deliveries to NWPL. Click to enlarge

Westcoast is currently conducting engineering assessments on both lines and is targeting mid-November for an operational capacity increase to 840 MMcf/d at the Huntingdon constraint point, further downstream from Station 4B. Westcoast also expects Huntingdon capacity could increase to 1.2-1.3 Bcf/d by the end of November, but forecasts that their maximum operational capacity there will be 1.3 Bcf/d for the rest of the winter. Given that flows through Huntingdon have averaged ~1.6 Bcf/d over the last three winters, this would still translate to 0.3 Bcf/d of cuts, even after the expected capacity increase at the end of November.

Flows through Huntingdon over the last three winters. Click to enlarge

Looking downstream, Westcoast’s export flows to the U.S. at its Sumas interconnect with Northwest Pipeline have dropped by ~600 MMcf/d.

The disruption to NWPL’s receipts from Westcoast has put significant upward pressure on Sumas basis price to incentivize the flow of alternative supplies. After averaging $(0.67) for the month of September, Sumas averaged $3.47 since the Westcoast explosion and has climbed as high as $10.95 per NGI data. Winter strip futures prices for Sumas have also shot up precipitously, reaching a high point of $4.58 week ending October 22, after averaging $(0.55) during September’s trading. Likewise, the winter strip futures prices for the Opal and Northwest Wyoming Pool hubs have posted more moderate, but still noteworthy increases following the onset of this Force Majeure. Both averaged just around $(0.50) during September’s trading, and have each added about $0.25 since the explosion, peaking at just 5 cents below the Hub.

Sumas flows and prices since September 1, 2018. Click to enlarge

Corresponding to this basis rally, offsetting supply has been entering the PNW, specifically NWPL’s main Washington-Oregon demand zone. The main example of this increase is a ~375 MMcf/d uptick in westbound flows through NWPL's Roosevelt compressor in south-central Washington. The lion’s share of that reroute comes from increased flows of Rockies gas through NWPL’s Kemmerer compressor near Opal, Wyoming. NWPL has also seen a smaller increase to its receipts of Alberta-sourced gas from GT Northwest at the Stanfield interconnect. NWPL benefited from decreased demand (down by ~150 MMcf/d) and increased storage withdrawals (up by ~100 MMcf/d). Inventory levels at its Jackson Prairie storage facility are also within normal ranges entering winter, at roughly 24 Bcf.

Map of NWPL and other regional pipes, and flows at Kemmerer and Roosevelt. Click to enlarge

Cash and forward spreads suggest Alberta would be the preferred source for compensatory supply – AECO futures have even felt slight downward pressure as expected from this event’s potential to back gas up into western Canada. However, constraints getting gas out of the western provinces will place collars on any incremental flow increases.

AECO and Opal cash spreads to sumas from November 2018 through April 2019. Click to enlarge

Looking upstream, this flow reduction translated to a notable production decrease in Canada’s two westernmost provinces of BC and Alberta. Production from northern BC essentially has no other outlets besides Westcoast’s southbound flow to NWPL or Westcoast’s eastbound deliveries into Alberta. Total production receipts on Westcoast averaged ~1.92 Bcf/d in the month prior to the explosion, and have averaged ~1.47 Bcf/d since then – a drop of ~450 MMcf/d. TC Alberta production has increased by ~100 MMcf/d since the explosion, resulting in a western Canadian production net dropoff of ~350 MMcf/d.

Total exports from western Canada have still dropped by ~575 MMcf/d, as small increases in exports by Alliance and TC Alberta have not been able to offset the significant drop in Westcoast’s deliveries to NWPL. Westcoast has been able to funnel some additional gas out of the province by increasing its deliveries to Alliance and TC Alberta by ~200 MMcf/d. Demand in these two provinces has been up by nearly 150 MMcf/d relative to pre-explosion levels, and Alberta has also increased its storage injections by ~75 MMcf/d.

Production cuts could continue for as long as Westcoast’s flow cut remains in effect because TC Alberta is already close to its maximum export capacity levels. TC Alberta is currently forecasting operational capacity for its Westgate and Eastgate export routes out through December 15. Based on these opcap values and historic flow data, Alberta may only be to get an incremental net 50 MMcf/d year-over-year out over the first part of this winter.

TC Alberta’s Westgate route tracks gas leaving Alberta to the southwest, and the majority of these molecules are destined for the Pacific Northwest by flowing on Foothills B.C. to GT Northwest. Foothills B.C. also delivers a small amount of gas within British Columbia. TC Alberta’s current maintenance plan shows that average Westgate capacity for November 1 through December 15 will be 2.38 Bcf/d. Last year in November and December, it flowed an average of 2.19 Bcf/d, so based on year-over-year comparisons, near-future export flows could increase by ~0.2 Bcf/d.

However, some of the incremental 0.2 Bcf/d out of Westgate may be eroded by lower winter-on-winter flows out of Eastgate, which represents the sum of volumes leaving Alberta through the Empress and McNeill border points. Deliveries at Empress go to the TransCanada Mainline, and deliveries at McNeill flow first onto Foothills Saskatchewan and then enter the U.S. on Northern Border. In November-December of 2017, Eastgate flows averaged 4.83 Bcf/d. This year, capacity is forecast to average 4.68 Bcf/d through December 15, about 0.15 Bcf/d below last year’s flows. Assuming that Westgate might increase up to 0.2 Bcf/d winter-on-winter but that Eastgate might need to decrease by about 0.15 Bcf/d, this would translate to an incremental export capacity of only ~0.05 Bcf/d (50 MMcf/d).